A financial blog on investing in stocks, commodities and the gold bull market.

Saturday, January 26, 2008

Looking for the next sector

I think we all realize we are in the grip of the bear at this point. Even Kudlow is starting to come to grips with the notion that we are going to experience a recession. What I don't see yet is despair. I see too many analysts trying to pick the bottom or the old "invest for the long term" crap being bandied about. We had a semi panic day on Tuesday but the Fed jumped in and saved the day. Actually they just made it worse. They are now guaranteeing that inflation is going to be spiking at the same time we are heading into an economic recession. What a wonderful combination! I'll be watching the COT's as usual for signs that the big money is buying. That will be our cue that it's time to jump back in the pool. In the meantime we need to be making plans for what we want to be buying when that bottom arrives. Well let's step back and look at what's going on. The Fed is now in panic mode just like I said they would be. The economy is slipping into recession and the politicians are freaking out. Incredible pressure is being brought on Ben to do something dammit. Well the only thing Ben can do is the wrong thing. Of course that doesn't matter to the politicians as long as it looks like something is being done. We need to be ready to take advantage of the Fed's actions. What's the one sector that is defying the bear? Precious metals of course. Gold and silver. Heck the precious metals are just about the only thing that's up so far this year. Now if they can hold up and actually rally while the rest of the market is failing can you imagine whats going to happen when this market bottoms and turns up?

I see quite a few analysts including Cramer beating the table on energy. I do think energy is going to perform well during the next bull but it's not going to be the leader anymore. Energy was the leader during the first phase of the commodity bull. We are now into the second phase. It's time for the laggards to catch up. Liquidity is going to flow into the undervalued sectors. That would be precious metals and agriculture. We are going to get the buying opportunity of a lifetime soon and you know what? Most investors are going to miss it. Not because they are afraid the bear isn't finished. No they are going to miss it because they will think that gold is too expensive or it's too overbought. Many will rationalize that they will be able to get in at a later date at better prices. I've got news for you in a raging bull market (make no mistake that is what's happening in the precious metals sector) the bull makes it very hard for investors to get back in if they lose their position. Anybody here lose their position in the Nasdaq in 99? This bull will end up going much farther than almost anyone can imagine including me.

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Technical trading rules

T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.

General Trading rules

G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules.G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag.G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.

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Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.